Leaders in Beijing probably let out a sigh of relief when the US-China “phase one” deal was signed in mid-January.
Even though China had committed to buying astronomical volumes of US commodities, it was a small price to pay. Not because this would magically fix China’s deteriorating ties with the US, but because it would give Beijing time to focus on shoring up its flailing economy.
Supporting economic growth is critical for the government this year as it has pledged to double per-capita incomes from 2010 levels by 2020. The estimated 6 per cent national growth required to meet this pledge seemed within reach, with macroeconomic indicators picking up since late 2019 and the Sino-US deal signed.
But then the novel coronavirus hit. Quarantines, industrial shutdowns and travel restrictions ensued, muffling the usual hustle and bustle of the lunar new year. Now, even though the country is returning to work gradually, many office buildings remain unoccupied and the country’s usually congested roads are eerily empty.
As the Chinese economy came to a virtual standstill just weeks after the ink on the deal had dried, its commodity demand has also taken a hit. China’s oil demand is estimated to have fallen by about a third, taking 3m to 4m barrels a day of demand off the market, or the equivalent of total Japanese oil product demand.
China’s refiners have announced run cuts of about 2m barrels a day, or 15 per cent of their productive capacity in February alone. Chinese gas demand has plummeted too, potentially by as much as 10bn cubic metres (bcm).
Assuming the virus peaks over the next few weeks and economic activity gradually picks up, some of the lost demand will be made up for later in the year. But for an already oversupplied gas market, losing the equivalent of total Singaporean demand is a huge blow.
In this context, then, it is hard to see how China can scale up its purchases of US energy products in line with the deal it signed with Washington. Beijing’s ambitious commitment entailed increasing its purchases of American energy products from their peak in 2017 — estimated at $8bn-$9bn — to $18.5bn this year and $33.9bn in 2021.
This would suggest China would need to more than double its purchases of crude, oil products, liquefied natural gas and coal. LNG was widely assumed to be an easy sell. China’s LNG imports increased by a massive 17 bcm and 18 bcm year on year in 2017 and 2018 respectively with US flows, at their peak in 2018, accounting for 3 bcm of that.
With new facilities starting to export out of the US and China’s commitment to make its economy greener, LNG could be a perfect fit.
There’s a wrinkle, though. First, in 2018 China imported less than $1bn worth of US LNG, with spot North East Asian prices at almost twice their current level, so in order for LNG to make a dent in the trade deficit, China would need to import considerably more.
Second, China’s LNG demand growth slowed to 11 bcm in 2019 as the economy slowed and the government focused on domestic production. Even if gas demand growth recovers this year, domestic production is on the up and China now has new pipeline gas coming in from Russia.
This leaves crude imports as China’s best bet for racking up an energy bill. In 2019, Chinese imports exceeded 10m b/d, suggesting ample room for China to widen its supplier portfolio. Arrivals from the US averaged a mere 120,000 b/d in 2019 but at their peak in 2018 they reached 450,000 b/d.
China could theoretically source almost 1m b/d from the US, but given its current appetite for crude, that would require all its incremental imports (and then some) to come from the US.
But the new refineries, which are behind the new buying, are designed for Middle Eastern grades. China’s state-owned peers, which are actively cutting production owing to the coronavirus outbreak, also tend to prefer heavier crudes than the shale oil produced in the US.
Still, markets alone will not determine the flow of US commodities to China and if instructed to import, Chinese state-owned buyers will begrudgingly comply. They will then need to decide which of their other suppliers to shun in favour of US grades.
China’s energy buyers therefore run the risk of sourcing large volumes of US energy only to find that demand growth is slower than expected or that US-China relations have frayed once more.
The coronavirus, as distressing as it is, could be China’s get-out-of-jail card. Beijing made it clear in the “phase one” deal that its purchases will be based on economics and market demand. If market demand isn’t there, neither is the buying binge.
Michal Meidan is the director of the China Energy Programme at the Oxford Institute for Energy Studies
